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hype7 (239530) writes 'The Harvard Business Review is running a fascinating article on how finance is increasingly abstracting itself — and the gains it makes — away from the creation of value in the real world, and how High Frequency Trading is the most extreme version of this phenomenon yet. From the article: "High frequency trading is a different phenomenon from the increasing focus on short term returns by human investors. But they're borne from a similar mindset: one in which financial returns are the priority, independent of whether they're associated with something innovative or useful in the real world. What Lewis's book demonstrated to me isn't just how "bad" HFTs are per se, but rather, what happens when finance keeps walking down the path it seems to be set on — a path that involves abstracting itself from the creation of real-world value. The final destination? It will enter a world entirely of its own — a world in which it is fighting to capture value that is completely independent of whether any is created in the first place."'

If you have the time (and if you're at work, of course you have the time!), I recommend The Great Hargeisa Goat Bubble [juliangough.com]. One guy gets his last goat killed by an aircraft so he can claim twice its value from the airport, and it all goes wrong from there.

Soon the shortage of actual goats led to a booming market in goat futures, goat options and increasingly arcane goat derivative products. This trade in young, unborn, and even theoretical goats allowed yet more money into a market whose only bottle-neck or brake up to this time had been the physical shortage of actual goats.

The way I see it, you can eliminate the advantages of HFT while keeping the markets highly responsive by imposing a "clocking" scheme on exchanges. When an order is received by an exchange, it is not executed immediately but stored in a queue to wait for the next clock tick. When that comes, the order queue is shuffled into random order and then executed sequentially. Make the clock ticks wait a random period between 40ms and 50ms and any timing advantage of HFT or geography is nullified. The exchanges are still highly responsive; they just do randomized batch processing. All of the requests they receive in the previous clock period ought to be processed within the new clock period (with perhaps some occasional spill-over, in which case the new clock tick is stretched).

1. HF traders don't participate in stockholder meetings and thus their trades are divorced from steering company direction.

2. CEOs are focused on next quarter profits and, aside from a few corporate founder CEOs, are not able to have their company innovate.

The first problem is not specific to HFT. Even buy-and-hold mom and pop cannot influence a stockholder meeting because they don't own enough shares to meaningfully do so. The exception proves the rule: a bunch of Palestinian human rights defenders got together, bought some Caterpillar stock, and got a human rights issue on the agenda. Even with all that effort, the measure did not pass. And it was a large effort in coordinating. Individual stockholders usually do not organize, coordinate and campaign. (The "transaction cost" is too high.)

The second problem is caused by SEC, SOX and CEO compensation structure, not by HFT. The HBR article suggests without actually accusing that HFT is the cause.

HFT serves little purpose other than providing market liquidity (and even at that arguably harms it given the flash crash), but it's not to blame for the above two pre-existing problems of today's markets of publicly traded companies.

What you are suggesting is book market – expect for the random part. Book markets in recent years have fared worse than quote driven markets – much worse. 5 to 10 cents worse per share – much greater than the fraction of a penny that the HFT steal.

You might want to a look at IEX. They use a quote driven model with a 350m delay. Lewis have them high praise but even they have had criticisms that they can be exploited.

To play devil's advocate for a position I find distasteful, but haven't yet heard a totally valid takedown of: the neo-liberal set(republicans, libertarians, you know) argue that pragmatically speaking, regulatory laws don't get unwound.

I consider myself insufficiently informed to either debunk or accept that argument, and lack a good tool to find out more.

Sweden tried a transaction tax in the 90s, but they made the tax too high (1% if I remember correctly). The results were not good for the Swedish economy so they rolled the law back. So there you go, even socialist countries like Sweden can rollback socialist laws if they turn out bad.

The creation of FPGA's to sit directly on the fiber leaving the stock exchanges has utterly corrupted high frequency trading. _No one_ in their remote office can get equal notice of small changes, and those FPGA's can flip transactions repeatedly as a stock rises to its new level, buying and selling and buying and selling to everyone else, and pulling their profits out of what normal traders would see. The transaction cost is much too low, and the forgiveness time to recall an unwise transaction is much too generous.

Unfortunately, there are also inevitable phase delays and feedback loops in such systems that can destroy the value of companies, and investors, who get caught in the unplanned positive feedback. They can't be "programmed against" because programming against them would slow the transactions and lose the very profit that HFT is reaping.

By your idiotic drivel, hammers have more rights than people too. After all, when's the last time you saw a hammer sent to jail? (incidentally, this argument is chock full of irony since there probably have been hammers and corporations effectively "sent" to "jail" in the US - see below) The fundamental problem here is that corporations don't actually commit crimes any more than any other sort of property commits crimes.

Do hammers have agency? Would the sentence "A hammer builds a house" make sense? How about "Apple releases new iWhatever"? Or "US established a beachhead on D-Day"?

We think and treat corporations, nations and other institutions as living beings because they are. We treat hammers as inanimate objects because they are inert matter. Yes, a corporation requires a human to act on its behalf to do anything, but similarly you require your muscle and neural cells to act on yours, and they in turn rely on molecular machines. And the difference between the US and USSR was not that one was made of different kinds of people than the other, but rather about the structures and values and even more importantly what the structures and values embodied - the "national spirit", so to say.

Now, I realize that the US legal system is rather dumb in this regard and actually have sent a variety of household items and assets to jail

The US legal system is no less fictitious than corporations are. Either they have existence and agency - effective personhood - or they don't. Which one is it?

The "value" of stock is by no means connected to real world revenue of the issuing corporations anymore. It's just dependent on expectations of stock traders and whether or not they have any "faith" in the paper.

So, essentially, it's not really that different from any other religion. It's lost its roots in reality long, long ago, not just since the advent of HFT. If any doubt existed, the dot.com bubble with overhyped "values" of stock of companies that never earned a single dime should've dispelled that assumption that stock value has anything to do with the real world well over a decade ago.

The reason high frequency trading is possible in the first place is because government regulations have created enormous barriers to entry for engaging in such trading. If anybody with a fast PC and fast network connection could make these trades in cheap, open exchanges, "finance" (i.e., rich political donors in New York) wouldn't be able to gain anything more than you would at home. In different words, high frequency trading would become like bitcoin mining, something for a large number of nerds each making a few bucks.

I do hope "finance" will become irrelevant, and by "finance", I mean the group of protected and politically connected rich guys in New York. Let's not use the problems caused by regulation and government intervention to justify even more regulation and government intervention, in a vicious cycle. And don't make the mistake attributing this problem to one party or the other.

Because I understand how markets work. Thin markets suck. Large bid-ask gaps suck. Losing 20% of your investment because you made a typo, and you take a 20% hit just between the best price you can buy for and the best price you can sell for sucks.

Oh my fucking god. You're seriously saying that the system I described in a couple lines couldn't possibly have a fail-safe mechanism for people who make a typo and purchase the wrong stock. Open your mind a little more.

I don't care if you hate my plan, and you certainly have more experience in the market itself. But don't bring up issues like "typos" if you expect to be taken seriously.

Let the casino gamblers provide liquidity, and rob each other. It doesn't actually cost us anything - in fact, competition between market makers (which is one thing HFT is used for) saves me a non-trivial amount in my once-per-quarter trading. It's much nicer now than even 10 years ago.

This is actually a good argument. Lead with this in future discussions with others, and forget about frickin typos.

I don't have an investment portfolio. The 401k I had at one time got cashed out a while ago. So, are the HFTs saving me money, or making my expenses go up? If they aren't saving me money, and are contributing to higher prices, I have the right to say put a limit on them. Or, if I don't have the right to limit them, what is the SEC for?